New York Markets After Hours

Not easy being green

Bright investment outlook for 'cleantech' stocks is becoming cloudier

By

SamMamudi

NEW YORK (MarketWatch) -- The greening of America is sprouting a few weeds.

Following President Barack Obama's election and Democratic congressional victories in November, many investors expected strong political action to combat climate change and turned bullish on the green-energy sector.

But such optimism has since softened as political realities and the impact of the frozen credit markets hit the sector, also known as cleantech.

The Obama administration hasn't moved as far or as fast on green energy as hoped, while cleantech companies, especially in the wind and solar areas, have found it hard to secure financing to build their infrastructure.

"A lot of folks thought that the minute we had a new administration, these companies would take off," said Paul Hilton, director of advanced equities research at Calvert Investments, which invests according to socially responsible principles.

While there has been a rally in the stocks, some managers think that it's still too early to be heavy in cleantech companies.

"We're hesitant to move into pure play names in the renewables area," said Andrea Reichert, research analyst at the Parnassus Funds, another socially conscious fund group.

There's also the question of just how much cleantech can grow.

"I appreciate that cleantech is going to gain market share, but there are limits to what a lot of these technologies can bring to the utility grid," said Brian Angerame, manager of Legg Mason Partners Capital Fund
SCCAX, +1.21%
a go-anywhere stock fund. For instance, reaping wind and solar energy can be inconsistent due to the weather, he said.

Both Reichert and Angerame said they like to play the cleantech sector indirectly, through good companies that stand to benefit from a boost in the broader area.

"We didn't know how fast and furious government support for the sector would be," said Angerame.

Gloomier view

Jankowska said that while she's still bullish on cleantech's long-term prospects, the short term picture isn't as rosy as it seemed a few months ago. And the sector's dramatic rise in the second quarter -- PowerShares WilderHill Clean Energy exchange-trade fund
PBW, -0.71%
jumped about 32% -- has actually added to her fears.

The market rally, coupled with tight financing, make Jankowska cautious for the short term.

"The frustrating thing," she said, "is that this wasn't a rally based on fundamentals" -- a fact that suggests to her that there'll be a pullback in the short-term.

The rally also deters Angerame from cleantech stocks.

"As investors we've had a hard time justifying the prices that solar and wind companies have been trading at," he said. In particular, he said it's very difficult to calculate the returns that these companies can expect.

Political headwinds are another obstacle. While the passage of the Waxman-Markey bill through the House of Representatives was historic -- committing the U.S. to emissions limits for the first time -- it wasn't as strong as first hoped.

The bill initially proposed that a minimum of 25% of U.S. energy come from renewable sources by 2020, but the final in the version that figure is effectively 15%. Much of the bill's contents are widely expected to be watered-down further as it passes through the Senate.

Still, Calvert's Hilton said, even the 15% standard will help cleantech companies: in 2006 just 2.4% of the U.S.'s energy was provided by renewable sources.

Old versus new

When it comes to energy, Richard Davis, London-based manager of BlackRock Commodities Income Investment Trust, is a believer in traditional sources such as oil and gas.

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